Don’t believe the hype about economic good news

Whenever the Brexiteers were confronted with experts warning that leaving the EU could be economically damaging, they knew just what to do: shout “scaremongering”, make a breezy accusation about EU-funded elites – and dismiss “experts”.

They were, of course, wrong. It’s been a month since the UK voted to leave the European Union, and  the official Leave campaign’s prediction that “after we Vote Leave, there won’t be a sudden change that disrupts the economy” is not holding up well.

Brexiteers might point to the news that the UK economy grew 0.6% in the second quarter of this year or that GlaxoSmithKline (GSK) is investing £275 million in expanding its UK sites. But the second quarter performance predates the result of the referendum, and the chief executive of GSK, Sir Andrew Witty, told the Financial Times that the Brexit vote “adds a bit to the negative side of the scales in making investment decisions”.

Investment will not stop as a result of the vote, but spread this caution across an economy and it could fall by a surprising amount.  And there are other signs of trouble ahead as well.

1. The morning after the vote, the pound fell to its lowest level in 31 years, before hitting a fresh new low earlier this month.
2. Because the moment the result became clear, the UK became a less attractive place to put your money. The International Monetary Fund now thinks the UK will only grow half as much next year as it would have – in the best case scenario.
3. And it’s not just the IMF scaremongering. The Confederation of British Industry says manufacturers’ optimism about the business situation has seen its fastest drop since 2009.
4. And the latest purchasing managers index – an early indicator for the state of the British economy – saw its largest ever fall, returning to its 2009 level.
5. And you can add to that the fall in the FTSE 250, which plunged after the vote, and is still down 2% from its pre-referendum high.
6. The Express and its “BREXIT BOOM” headline writers would probably disagree. After all, the FTSE 100 is higher than it was before the vote! Except that the FTSE 100 companies generate quite a lot of their income abroad – so the lower pound inflates their value.
   

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7. Back in Britain, people are trying to get their money out of some investments. Seven property funds have suspended trading in the biggest freeze of investment funds since 2008. Evidence is mounting that property prices have stalled and may be falling.
8. The government is also hurting. In one of his last acts as Chancellor, George Osborne dropped his ambition to deliver a budget surplus.
9. And his successor, Philip Hammond, says he might have to “reset” fiscal policy in the Autumn. He can try to give the economy a shot in the arm by spending more, but there are limits to how far he can go…
10. Particularly after the Brexit vote saw us lose our AAA credit rating.  As it is, UK borrowing in 2015/2016 was £75 billion or a big 4% of GDP and be £65 billion higher than forecast over the next couple of years as Hammond tries to counter the post-referendum slowdown.
11. Hammond might get some help from the Bank of England, where chief economist Andy Haldane thinks we need a stimulus “sledgehammer”: interest rate cuts, and more quantitative easing. Mark Carney, the Bank’s governor, has already “guided” investors to expect lower interest rates.
12. The real worry is that all of this is still unfolding. People are still optimistic that we’ll work out a good deal with the EU, staying in the single market. If we don’t, things could be much worse. In any event the uncertainty could drag on for years.
13. And even the Brexit architects are already feeling the pinch. Boris Johnson, our new foreign secretary, has lost his £275,000 a year Daily Telegraph column, and has been forced into a flatsharing arrangement with Liam Fox and David Davis. It’s a hard life.

Edited by Michael Prest